Caviar Fishfarm Ltd (‘CFL’) is unlevered, (all equity) has an equity beta of 1.25 and unlevered cash flows of

Caviar Fishfarm Ltd (‘CFL’) is unlevered, (all equity) has an equity beta of 1.25 and unlevered cash flows of

$76,800 per annum that will continue in perpetuity.

The expected market return is 10%p.a and Treasury bills earn 2%p.a.

CFL is currently considering issuing $300,000 in new debt with an 8% interest rate. CFL would repurchase $300,000 of its own shares, using the proceeds of the debt issue. There are currently 32,000 shares outstanding and the company’s effective marginal tax rate is 34%.

 The value of a share in the company before it announces the capital restructure is closest to: 

Select one:

a. $18.87

b. $20.00

c. $13.20

d. $22.00

EBIT = $ 76800( 1= 0. 34 )116363. 64Before ReconstructionAfterReconstructionEBIT116363+ 6411 6 363 . 6494000( 30 0 0 0 0 X 8 % )EBT116363.6492363. 67( – Han @ 34 %39563, 6431403 ….